Joe Biden has just signed off a package of reforms which should have a profound impact on retirement saving in the USA. It is too early to consider whether they will impact political thinking in the UK or other developed nations when defined contribution workplace pensions dominate. See for yourselves.
Collectively the retirement reforms are known as “Secure 2.0”
The goal of Secure 2.0 is to build upon changes implemented by the 2019 Secure Act, such as expanding retirement-plan access to more workers.
Three years after the Secure Act of 2019 ushered in the first major changes to the U.S. retirement system in more than a decade, more modifications are now on their way.
Dozens of retirement-related provisions collectively known as “Secure 2.0” are included in a $1.7 trillion omnibus appropriations bill
“Part-time workers, military spouses, small-business employees, and student loan borrowers are just a few who will benefit and have a better chance of positioning themselves for a more financially secure retirement as a result of Congress’s action today,”
The Secure 2.0 provisions are intended to build on improvements to the retirement system that were implemented under the 2019 Secure Act. Those changes included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions, or RMDs, from certain retirement accounts must start — to age 72 from 70½.
This time around, some of the many provisions that are in the massive appropriations bill include:
- Requiring automatic 401(k) enrollment: Employers would be required to automatically enroll employees in their 401(k) plan at a rate of least 3% but not more than 10%. Businesses with 10 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate.
- Increasing the age when RMDs would need to start: The current bill would increase it from age 72 to age 73 in 2023 and then to age 75 in 2033. Additionally, the penalty for failing to take RMDs would be reduced to 25%, and in some cases, 10%, from the current 50%.
- Creating bigger “catch-up” contributions for older retirement savers: Under current law, you can put an extra $6,500 annually in your 401(k) once you reach age 50. Secure 2.0 would increase the limit to $10,000 (or 50% more than the regular catch-up amount) starting in 2025 for savers ages 60 to 63. Catch-up amounts also would be indexed for inflation. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less.
- Broadening employer 401(k) match options: A proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying student loans instead of saving for retirement.
- Improving worker access to emergency savings: One provision would let employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Companies also could let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.
- Increasing part-time workers’ access to retirement accounts: The original Secure Act made it so part-time workers who book between 500 and 999 hours for three consecutive years could be eligible for their company’s 401(k). Secure 2.0 reduces that to two years. Companies already have been required to grant eligibility to employees who work at least 1,000 hours in a year.
- Boosting how much can be put in a qualified longevity annuity contract: Currently, the maximum that can go into a QLAC is either $135,000 or 25% of the value of your retirement accounts, whichever is less. Secure 2.0 eliminates the 25% cap and increases the maximum amount allowed in a QLAC to $200,000.
- Creating a federal matching contribution for lower-income retirement savers: An existing tax credit for low- and moderate-income individuals who contribute to retirement accounts would become a limited government-funded matching contribution.
- Changing the required minimum distribution rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account owner’s life, that’s not the case for Roth 401(k)s. Starting in 2024, the pre-death distribution requirement would be eliminated.
- Broadening uses for unused college savings money: A provision would allow for tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts that are at least 15 years old, within limits.
- Helping military spouses get access to retirement plans: Secure 2.0 creates tax credits for small businesses that let military spouses enroll right away in their plan and qualify for immediate vesting of any employer matches.
The bill also includes incentives for small businesses to set up retirement savings plans for their workers, encourages individuals to set aside long-term savings and makes it easier for annuities to be an income option for retirees.
With respect to SECURE 2.0, here is what one US benefits industry veteran (43+ years) thinks:
Requiring automatic 401(k) enrollment: Wrong answer. Only applies to new plans. Employers who want auto features have known how to do that for 15+ years (since Pension Protection Act of 2006). More likely to REDUCE the number of new plans than to increase the number of new plans.
Increasing the age when RMDs would need to start: Wrong answer. Only those who don’t need retirement income will defer.
Creating bigger “catch-up” contributions for older retirement savers: Wrong answer. Roth limit adds complexity, age 60 – 63 increases are “too late” (too close to retirement) and “too limited” (too few years (4), too small of an increase (why not the Code Section 415(c) annual addition limit, since it is Roth.)
Broadening employer 401(k) match options: A proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying student loans instead of saving for retirement. Wrong answer. Better for workers to contribute to the plan and borrow – offers a better, more tax-favored liquidity solution, along the way to retirement.
Improving worker access to emergency savings:
One provision would let employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Wrong answer: Should let them borrow $1,000 and give them an extended opportunity to repay the loan without interest – until say, the end of the calendar quarter following the calendar quarter in which the loan was initiated.
Companies also could let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500. Wrong answer. Most of the people who don’t have emergency savings live paycheck to paycheck and are in debt. Most of those folks aren’t saving for retirement, and are, in fact, foregoing the tax-preferences and employer financial support. So, anything that diverts monies away from retirement savings is likely harming not only retirement preparation, but also household wealth. Keep in mind that you can only have this account as a sidecar to a retirement savings plan – a 401k, 403b, 457.
Increasing part-time workers’ access to retirement accounts: Wrong answer. Administratively cumbersome. And an employer could already do that voluntarily.
Creating a federal matching contribution for lower-income retirement savers: Wrong answer. A better answer would allow for the carry forward of the credit until such time as the individual actually pays income taxes.
I could go on. But the fact is that this is all “colored bubbles”. Congress continues to ignore the chronic underfunding of entitlements – the Social Security and Medicare trust funds – one is expected to be exhausted by 2034, the other by 2026. Yes, Virginia, that is in 3 years.
Further, Congress has made no provision, in terms of funding, for Medicare Part B, Medicare Part D, and Medicaid (for the 1 in 5 American retirees who are “dual eligible” for both Medicare and Medicaid). Those programs are funded mostly with general revenues – primarily the ~50% of American households who pay income taxes, or, just as likely these days, those who will pay income taxes in the future (as we continue to add $1+T per year of deficit spending to our national debt).
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